Are we witnessing an open source finance revolution?

by Brett Scott on December 11, 2013

Financial democracy requires bypassing large unaccountable institutions and reconnecting people to the reality of their money — by producing it ourselves.

In 2012, in celebration of Elizabeth II’s Diamond Jubilee, I suggested that we securitize the Queen, using her as collateral for UK government borrowing. I thought she would support this modest proposal because royalty have long been financial innovators. Indeed, what were the old medieval armies but a blunt financial instrument? Monarchs invested resources into them in order to extract dividends from conquered peoples who did not want to be bludgeoned to death.

Perhaps I was being unfair. Dear old Queenie is much milder than her predecessors, and nowadays the power has relocated to much more subtle warlords. Instead of armies of young men wearing armor, we have seen the drafting of armies of young men and women wearing suits and ties, carrying Oxbridge and Ivy League degrees, sent off to battle it out in the capital markets and trading floors of global investment banks, commercial banks and hedge funds.

Actually, they are more like a scattered mercenary force, pledging loose allegiance to titanic institutions that are in a perpetual state of territorial rivalry over who gets to control the remains of the global commons. Barclays Capital slashes out a space for itself in the global interest rate swap market, while Goldman Sachs snarls at those pushing in on the commodity trading space they dominate. Citigroup and Deutsche Bank hoard the global flows of foreign exchange.

Some still maintain the fiction that these are national entities. These institutions can draw on the resources of nation states, but their habitat is global. They form an interconnected network emanating out from major financial centers via undersea fiber-optic cables to tax havens and shadow banking structures, and from there into copper mines in the DRC, and property developments in Brazil, and then back again.

The transnational financial regime that has been established appears natural to us, and yet simultaneously alienating and vaguely menacing. Unlike a monarch, it does not extract money from society in the form of blunt tribute, but rather in the form of privatized gains and socialized losses. And while political democracy has gradually extended, the financial world still largely remains a system of restricted access. The average person has been expected to accept this and to be grateful.

This passivity is actively encouraged by financial intermediaries. Look, for example, at banking advertisements. They constantly portray the humble and responsible citizen just trying to get on with their lives, respectfully accepting the patronizing brochures about mortgage deals and savings accounts from the smiling bank manager. Beyond this rhetoric of inclusion, the sector displays implicit contempt for ‘little people’. There is no real bank manager. There are only generic forms that feed into an IT system programmed by technocrats with little knowledge of whether someone has a viable small business idea or not. Within the sector, ‘real’ finance is not seen to be about enabling or empowering real activities of real people. Rather, it’s all about big men doing big deals with other big men to get to a point where everyone thinks they’re a ‘big swinging dick’.

Even government attempts to shift the sector away from macho-man deal-mongering towards a model of ‘socially useful’ banking can be shallow. There are proposals for getting banks to lend more to small businesses, for example, but the government proposals, at best, seem aimed at turning the financial sector into a more benign dictatorship.

Let’s get something straight: banks are not ‘private’ businesses. They are subject to extensive public privileges, such as the exclusive ability to create most of the electronic money supply, and the subsequent role of upholding the electronic payments system. Then there’s the small issue of them being able to demand bailouts when things go wrong.

In this context, how well the regulation is written is but one issue. The much deeper question is whether the everyday person has any real democratic say in access to, or understanding of, these systemically important institutions. True financial democracy means reconnecting people to the reality of what their money is and what it funds, and in building a culture in which people accept responsibility for defining a vision for where it goes, rather than deferring that responsibility to large, unaccountable institutions.

Open Source Finance: a slow-motion revolution

Recently, though, small insurrections have started to occur. There was Occupy, which was an in-your-face expression of discontent, but I’m thinking of the less overt insurrections, hacking away like small axes on the big tree.

I notice it when I look at my email inbox. There’s an announcement from MoveYourMoney UK, saying 2.4 million people in the UK have shifted their money away from major banks. There are emails from friends, on the verge of successfully completing crowdfunding projects, something largely unheard of several years ago. And why is the public at large suddenly fascinated by understanding Bitcoin? A few years we might have said “A collective of people taking it upon themselves to build their own global currency? Ha, it will never work!”

These individual examples, perhaps of limited significance in themselves, point to a potential change in societal attitude. People (and perhaps especially young people) are more prepared to consider things like peer-to-peer co-operation and exchange, collaborative production and consumption technologies. The occasional Facebook post about some non-monetary sharing economy platform perhaps doesn’t register as a flashy news item to the person viewing it, but collectively these ideas are working their way into the public imagination, shifting the notion of what’s possible.

The industrial revolution was only perceptible in hindsight, and that was a technological process that broke existing social structures. Perhaps now we are seeing a slow-motion revolution in financial life. So what might we call it? I personally call it ‘Open Source Finance.’

The open source movement started with the campaign for free access to software source code, and has since expanded to include many other open production and distribution processes. Consider Wikipedia. As an individual, I can do five things with Wikipedia:

Firstly, I can contribute to it, essentially helping to produce Wikipedia.

Secondly, I can also use it as a commons, provided I have access to the internet.

Thirdly, I can also monitor what happens there, track and challenge changes.

Fourthly, I can identify myself with the Wikipedia community, and take pride at my contribution within that community.

Finally, I can have access to the most basic source code, and can break away and form my own versions of it.

These five elements — access to means of production, access to common resource usage, ability to monitor, ability to join the community, and ability to fork off to build an alternative — are all lacking in the current global financial system. The insurrections, though, are challenging different aspects of this.

Campaign #1: Expanding access to means of financial production

Very few of us perceive ourselves as offering financial services when we deposit our money in banks. Mostly we perceive ourselves as passive recipients of services. Put another way, we frequently don’t imagine we have the capability to produce financial services, even though the entire financial system is foundationally constructed from the actions of small-scale players depositing money into banks and funds, buying the products of companies that receive loans, and culturally validating the money system that the banks uphold. Let’s look though, at a few examples of prototypes that are breaking this down:

Peer-to-peer finance models: if you decide to lend money to your friend, you directly perceive yourself as offering them a service. P2P finance platforms extend that concept far beyond your circle of close contacts, so that you can directly offer a financial service to someone who needs it. In essence, such platforms offer you access to an active, direct role in producing financial services, rather than an indirect, passive one.

There are many interesting examples of actual open source financial software aimed at helping to fulfill the overall mission of an open financial system. Check out Mifos and Cyclos, and Hamlets (developed by Community Forge), all of which are designed to help people set up their own financial institutions.

Alternative currencies: there’s a reason why there is so much hype around Bitcoin. As a member of the Bitcoin community, I am much more aware of my role in upholding — or producing — the system, than I am when using normal money, which I had no conscious role in producing. The scope to invent your own currency goes far beyond crypto-currencies, though: local currencies, time-banks, and mutual credit systems are emerging all over.

Campaign #2: expanding access to financial services

Financial intermediaries like banks and funds serve as powerful gatekeepers to access to financing. To some extent this is a valid role — much like a publisher or music label will attempt to only publish books or music that they believe are high quality enough — but on the other hand this leads to excessive power vested in the intermediaries, and systematic bias in what gets to survive. When combined with a lack of democratic accountability, you can have whole societies held hostage to the (arbitrary) whims, prejudices and interests of such intermediaries.

Expanding access to financial services is thus a big front in the battle for financial democratization. In addition to more traditional means of building financial inclusion – such as credit unions and micro-finance — here are two areas to look at:

Crowdfunding: in the dominant financial system, you have to suck up to a single set of gatekeepers to get financing, hoping they won’t exclude you. Crowdfunding, though, has expanded access to receiving financial services to a whole host of people who previously wouldn’t have had access, such as artists, small-scale filmmakers, activists, and entrepreneurs with no track record.

Mobile banking: This is a big area, with important implications for international development and ICT4D. Check out innovations like M-Pesa in Kenya, a technology to use mobile phones as proto-bank accounts. This in itself doesn’t necessarily guarantee inclusion, but it expands potential access to the system to people who have so far been ignored by most banks.

Do you know where the money in the big banks goes? No, of course not. They don’t publish it, under the guise of commercial confidentiality. It’s like they want to have their cake and eat it: “we’ll call ourselves intermediaries, but don’t ever ask for any accountability.” And what about the money in your pension fund? Also very little accountability. The intermediary system is incredibly opaque, but attempts to make it more transparent are emerging. Here are some examples:

Triodos Bank and Charity Bank are examples of banks that publish exactly what projects they lend to. This gives you the ability to hold them to account in a way that no other bank will allow you to do.

Corporations extract value out of assets and then distribute that via financial instruments to shareholders and creditors. Corporate structures, though, including those used by banks themselves, have reached a level of complexity approaching pure obfuscation. There can be no democratic accountability when you can’t even see who owns what. Groups like OpenCorporates and Open Oil are offering new open data tools to shine light on the shadowy world of tax havens, ownership structures and contracts.

Embedded in peer-to-peer platforms is a new model of accountability, as well. When people are treated as mere account numbers by banks, people in return feel little accountability towards the banks. On the other hand, if an individual has directly placed trust in me, I feel much more compelled to respect that.

Campaign #4: building an ethos of non-prescriptive DIY collaboration

At the heart of open source movements is a deep do-it-yourself ethos. This is in part about the sheer joy of producing things, but also about asserting individual power over institutionalized arrangements and pre-established officialdom. Alongside this, and deeply tied to the DIY ethos, is the search to remove individual alienation: you are not a cog in a wheel, producing stuff you don’t have a stake in, in order to consume stuff that you don’t know the origins of. Unalienated labor includes the right to produce where you feel most capable or excited.

This ethos of individual responsibility and creativity stands in contrast to the traditional passive frame of finance that is frequently found on both the right and left of the political spectrum. Part of the essence of DIY is to band together, not via the enforced hierarchy of the corporation or bureaucracy, but as part of a like-minded community of individuals creatively offering services to each other. Here’s a few examples of this:

BrewDog’s ‘Equity for Punks’ share offering is probably only going to attract beer-lovers, but that’s the point — you get together as a group that has a mutual appreciation for a project, and you finance it, and then when you’re drinking the beer you’ll know you helped make it happen in a small way.

The right to dissent is a crucial component of a democratic society. But for dissent to be effective, it has to be informed and constructive, rather than reactive and regressive. There is much dissent towards the current financial system, but while people are (theoretically) free to voice their displeasure, they find it very difficult to actually act on their displeasure. We may loathe the smug banking oligopoly, but we’re frequently compelled to submit ourselves to their dictates.

Furthermore, much dissent doesn’t have a clear vision of what alternative is sought. This is partially due to the fact that access to financial ‘source code’ (more on that here) — or education about how the system operates — is so limited. It’s hard to articulate ideas about what’s wrong when one cannot articulate how the current system works. Most financial knowledge is currently held in proprietary formulas wrapped in obscure jargon-laden language within the financial sector. Poor financial literacy on the part of most people is one of the foundational sources of strength for existing financial institutions.

It’s in recognition of this that I wrote a guide to global finance. Access to financial education, though, needs to be combined with the ability to act on it. A core principle of open source movements is the Right to Fork. This is the ability to take preexisting code, and to modify it or use it as the basis for your own. This is the ability to break away, which is both a check on power, and a force for diversity and creativity.

The mainstream financial system contains extensive blocks on the right to fork, many of them actively enforced by financial regulators. That’s an ongoing fight, but the right to break away needs to be instilled into the design of any alternatives too. I don’t want to replace a world where I am forced to use national fiat currencies or privately created credit money with one in which I’m forced to use Bitcoin. The point is to create meaningful options for people. And as these options emerge, the infrastructure, norms and cultural acceptance for a more connected, creative, open financial system may begin to emerge and coalesce into reality.